Case Study
Ramesh
developed original specification of a product and founded Ramesh Manufacturing
Ltd. In 2007 the firm manufactured 980 nos at an average price of Rs.900/-
each. In 2008 due to continuous price rise of the inputs, he raised his prices
at an average of 12%, since he knew he could sell plant’s full capacity of 980
nos per year. In spite of price rise for the product, which sold for over Rs.1000/-
for the first time. Ramesh was surprised to learn in late 2008 (as may be seen
from the financial statements) that Ramesh Manufacturing Ltd show a decline in
earnings and still worse, decline in cash flow.
His
accountant has bought the following:
i)
We are following
FIFO system for the purpose of issues.
ii)
Costs are going up
faster than 12% and they will go up further in 2009.
iii)
We are not setting
aside enough to replace the machinery; we need to set aside Rs.1,65,000/- not
Rs.1,50,000/- so as to be able to buy new machinery.
iv)
It is still not late
to switch to LIFO for 2008. This will reduce closing inventory to Rs.3,30,000/-
and raise cost of goods sold
